Development vs. Acquisitions

Could someone go into a bit of detail of how different the proforma model may be for underwriting a large multi-family development compared to doing acquisitions where you are solely buying the already developed asset? What other forms of information would you be looking at? I know this is broad but looking for any insight

 
Most Helpful

Biggest differences are going to be:

  • Including an full fledged development budget rather than maybe just a couple capex items

  • Running the development costs through the cash flow based on when you think they're likely to occur (some people like to do a bell curve or s curve here)

  • Modelling the sources and uses such that the debt begins to draw based on costs incurred (typically with all the equity/mezz going in first)

  • Including an operating deficit function within the development budget so that you're setting aside a line item for the first few months where operations are yielding negative cash flow

  • Modelling an iterative interest reserve within the budget for the construction debt (you'll want a circ breaker here). Then you'll usually model an interim income offset against the interest reserve - such that any positive net cash flow that occurs during the construction period first goes to offset interest expense, then goes to knock down the debt or offset debt proceeds

  • Underwriting the actual lease-up/absorption of the property - e.g. you're absorbing x units per month with some % of income abated due to concessions, meanwhile some of your expenses are ramping up based on occupancy

 
decrebepro:

Biggest differences are going to be:

  • Including an full fledged development budget rather than maybe just a couple capex items
  • Running the development costs through the cash flow based on when you think they're likely to occur (some people like to do a bell curve or s curve here)
  • Modelling the sources and uses such that the debt begins to draw based on costs incurred (typically with all the equity/mezz going in first)
  • Including an operating deficit function within the development budget so that you're setting aside a line item for the first few months where operations are yielding negative cash flow
  • Modelling an iterative interest reserve within the budget for the construction debt (you'll want a circ breaker here). Then you'll usually model an interim income offset against the interest reserve - such that any positive net cash flow that occurs during the construction period first goes to offset interest expense, then goes to knock down the debt or offset debt proceeds
  • Underwriting the actual lease-up/absorption of the property - e.g. you're absorbing x units per month with some % of income abated due to concessions, meanwhile some of your expenses are ramping up based on occupancy

That’s a great response.

FYI: Construction interest will be LIBOR (at least for another year or so) plus a set spread. So need to include forward-looking monthly LIBOR projections.

The hardest part is likely determining the percentage of each monthly draw, along with accurately hitting the absorption rate and overall deal timing.

Need to include FF&E, all of the pursuit/design costs (which can top $1.2M for institutional grade MF), along with calculations for builders risk insurance, tax rates during construction and then at stabilization (which requires a tax study). And need to handicap what the utility costs will be.

Also need to include construction interest reserves, operations reserves, hard and soft cost contingencies, impact fees and construction permits (which can widely range from $150k to $2M+), cost of bonds/letters of credit, and development fee.

New development pro forma modeling is much more complex than running a model for an acquisition. It’s not really something that someone without experience can do...in my opinion. This is because you need reference points on several line item costs, many of which you would need to obtain from third party sources.

Furthermore, you have to determine how to factor in potential construction cost escalations, how to phase in operational costs, and even (many times) include some up front costs like marketing expense and off site leasing center during construction.

The biggest metric is terms of whether a deal is a go/no go is the yield on cost at stabilization. In this market...in my opinion...when it comes to MF...anything sub 6.2% is a marginal deal...between 6.2-6.8% is a respectable deal...and anything above 6.8% is a solid deal. I’ll also say that anything in excess of 7.5% is either a very rare homerun or the result of faulty analysis.

Happy to answer any further questions.

 

Tenetur optio illo dolorem enim ratione consequatur qui. Blanditiis qui id non et dolorem facilis rerum recusandae. Maiores assumenda tempore deserunt molestiae. Excepturi dolor dicta accusantium et vitae.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
GameTheory's picture
GameTheory
98.9
6
dosk17's picture
dosk17
98.9
7
DrApeman's picture
DrApeman
98.9
8
CompBanker's picture
CompBanker
98.9
9
kanon's picture
kanon
98.9
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”